Incyte Corporation — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2017, with comparisons to Q1 2016. Incyte is a biopharmaceutical company with commercial products JAKAFI in the U.S. and ICLUSIG in Europe and other licensed territories, alongside a broad development pipeline. The company reports one operating segment.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $384.1 million | $263.5 million |
| Product revenue | $264.8 million | $183.3 million |
| Product royalty revenue | $29.2 million | $21.9 million |
| Contract revenue | $90.0 million | $58.2 million |
| Research and development expense | $408.0 million | $156.8 million |
| Operating income (loss) | $(133.3) million | $36.0 million |
| Net income (loss) | $(187.1) million | $24.0 million |
| Diluted EPS | $(0.96) | $0.12 |
| Operating cash flow | $(173.6) million | $97.5 million |
- JAKAFI revenue was $251.1 million, up from $183.3 million; management attributed the increase to $49.8 million of volume growth and $18.0 million of price growth. ICLUSIG revenue was $13.7 million, following the 2016 acquisition of European rights and operations.
- Product gross margin was approximately 94.4% (product revenue less reported product cost of revenue). Operating and net margins were approximately (34.7)% and (48.7)%, respectively.
- R&D expense rose sharply, primarily reflecting pipeline investment and $209.1 million of charges associated with the Calithera and Merus agreements and the amended Agenus agreement. SG&A was $87.2 million, versus $64.6 million.
- Q1 net loss included a $54.1 million expense related to induced senior-note conversions, a $5.8 million unrealized loss on long-term investments, and a $7.4 million increase in the fair value of ARIAD-related contingent consideration.
Financial position and liquidity
- At March 31, 2017, cash and cash equivalents were $361.8 million and current marketable securities were $150.1 million; management reported $512.0 million of available cash, cash equivalents and marketable securities. Long-term investments totaled $158.3 million.
- Total assets were $1.607 billion and stockholders’ equity was $965.9 million. The accumulated deficit was $1.864 billion.
- Convertible-note carrying value fell to $41.6 million from $651.5 million at year-end after exchanges of approximately $702.6 million in aggregate principal. The company issued shares and paid cash and premium shares in connection with the exchanges; it stated intent to settle future conversions in common shares. Contractual principal obligations were reported as $47.1 million.
- Cash declined by $290.5 million during the quarter. In addition to operating cash use, investing cash use was $138.8 million, including $123.9 million of long-term investment purchases and $21.0 million of capital expenditures.
- Management said available cash, cash equivalents and marketable securities should be adequate for capital needs for at least the next 12 months. Total contractual obligations were $76.4 million, principally debt and leases; future license, milestone and royalty commitments may add to cash needs.
Material changes, outlook and risks
- Revenue increased 45.8% year over year, while the company moved from net income to a substantial net loss as R&D spending and note-conversion costs increased. Contract revenue included a $65.0 million Lilly milestone for European Commission approval of baricitinib and a $25.0 million Novartis milestone for a Phase III ruxolitinib GVHD trial.
- In April 2017, after quarter-end, the FDA issued a complete response letter for baricitinib in rheumatoid arthritis, citing the need for additional clinical data on dosing and safety. The companies disagreed with the FDA; resubmission timing depended on further discussions. Baricitinib had received European approval in February 2017.
- Incyte made significant pipeline commitments: a $120.0 million Merus upfront payment, a $45.0 million Calithera license payment, and $20.0 million in accelerated Agenus milestones, among other collaboration and development costs. The filing describes clinical programs and expected trial starts, but provides no formal financial guidance or quantified revenue outlook.
- Key risks include dependence on JAKAFI sales and reimbursement, clinical and regulatory uncertainty, reliance on collaborators and third-party manufacturers, competition and potential generic entry, and execution of international operations. A generic applicant challenged certain JAKAFI patents; Incyte said it did not consider a loss probable or estimable at this time.
- Product sales allowances, including government rebates and chargebacks, depend on estimates and may change as claims are received. Four customers accounted for 64% of Q1 2017 net product revenue, underscoring customer concentration.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether JAKAFI sales growth, pricing and reimbursement trends can continue, and how rebate and chargeback accruals develop.
- How the baricitinib FDA response affects the timing, costs and potential value of the program, notwithstanding European approval.
- Whether pipeline spending and collaboration obligations—including contingent milestones, royalties and co-development costs—remain consistent with available liquidity.
- The status and dilution implications of remaining convertible notes and any further share settlements.
- Progress of key clinical programs and regulatory milestones, including epacadostat, ruxolitinib in GVHD and ICLUSIG development; clinical outcomes and approvals are uncertain.
- Developments in the JAKAFI generic patent challenge, product reimbursement, manufacturing supply and customer concentration.